Report Issued on Restoring Economic Health to Contract Poultry Production

Report Issued on Restoring Economic Health to Contract Poultry Production

Auburn University's widely published Agricultural Economist Dr C Robert Taylor, and David Domina of Domina Law Group pc llo released a comprehensive study of the state of poultry production in the United States. The Paper was filed with the US Department of Justice and the US Department of Agriculture as a prelude to a May 21, 2010 scheduled workshop on poultry markets and legal issues. The Study may be read here.

U S Attorney General Eric Holder, U S Secretary of Agriculture Tom Vilsack, and Deputy Attorney General for Antitrust Enforcement Christine Varney will attend the Conference in Alabama. Dr. Taylor will serve as a panelist and spokesman.

The Domina & Taylor Study finds, among other things, that:

1. The domestic poultry meat industry is integrated vertically. This means ownership and control of essentially all aspects of production in the vertical chain from baby chick to processed broilers and wholesale poultry products is held by poultry companies. These companies are commonly known as “integrators.” The poultry industry, which includes broiler, turkey and egg production, is the most vertically integrated of all major agricultural industries.

2. Integrators generally own or control the breeding flock, hatcheries, chicks, assignment of baby chicks to growers, feedmills, feed ingredients, transportation of feed, and processing (slaughter) plants. These companies, integrating all decision making affecting poultry production, direct the course of action in all key areas of production: placement of baby chicks, the number of chicks placed with each grower, what birds are fed, and when birds ready for processing will be picked up from the grower. Integrators also dictate physical size and equipment specifications for grow out house and equipment. Locations or placements of grow out facilities are fully dictated by the integrators.

3. Under the dominant business arrangement, the integrator owns the chicks and the feed, while farmers, commonly called contract growers, carry out actual production, or grow out, from chicks to birds ready for processing. If the bird dies, it becomes the grower’s property and responsibility. This is achieved by paying the grower or producer for only what is returned when the birds reach slaughter weight.

4. The integrator directs and oversees the production process and serves as overlord to the contract grower. Company representatives (called service technicians) typically visit each producer and grow out house weekly to supervise the grower’s work and check on litter, waste and dead birds.

5. Integrator representatives also give directives governing maintenance and upgrades of facilities. They police the handcuffing provisions in nonnegotiable standardized contracts integrators demand of growers. “This network of company specialists (i.e. service technicians) comprises the command-and-control structure that specifies the grower’s production process.”

Domina & Taylor concluded their Study with these comments and recommendations:

“We believe that the following changes would go far to restore competition and fairness in the poultry industry. The changes might make it possible to avoid the necessity to split integrators into smaller units. Information is power. Information asymmetry is a power imbalance. Eliminating the huge power imbalance in the poultry industry is imperative. Steps that need to be taken are

1. USDA must collect and publicly report average contract pay by region, at least annually
2. Grower settlement must be required to include basic information, such as breed, strain and sex of chicks, health and feeding histories.
3. Growers must have means to validate essential payment computation parameters. Transparency and validation must be required.
4. Detailed information—AgriStats – now available to integrators to share with each other must be made public promptly. This must become USDA NASS data.
5. More information like the Alabama Farm Business Analysis Association managerial records need to be publicly provided along with educational programs on the true economics (not just cash-flow) of poultry production.
6. Growers should be less trusting of representations made by integrators, or get such representations in writing.
7. Contract reform must occur. Grower contracts must have legally controlling criteria; a balance of power in contracting is needed.
8. Pre-dispute mandatory arbitration provisions and waivers to the right to trial by jury at the time of contracting must not be allowed to continue. The use of the courts and the right to trial by jury are basic to the American system.
9. Contract must clearly state who owns used litter and waste, and not just who is responsible for disposal of waste and dead birds.10.
10. Contracts must be publicly available. Legislation similar to the swine contract library must be enacted.
11. Bankers must “wake-up.” Routinely making 10-15 year loans on the basis of a contract that only guarantees a single flock of birds is not a sound banking practice. Multi-year contracts that guarantee only a single flock of birds do not solve the bankers or growers problems. Contracts need to guarantee a minimum number of flocks over a long enough time period to at least insure loan repayment.
12. Banking credit standards must be adjusted to analyze long-term risks and rewards for the banker and the grower over the term of the loan, and the capital asset’s, useful life. This can be done with banking credit regulations that will not be an onerous burden.
13. Contracts must be for longer time periods, and must include grower renewal options and prohibitions against assignment by the integrator to a shell entity or financially weak successor. Contracts should permit the integrator to “buy out” of the contract at a declining rate over the life of a house.”

May, 2010